The conversations around solving economic disparity for low-income families and individuals constantly evolve into social workers advocating for higher income.
Professor William Elliott, currently a lecturer at the University of Michigan and a leading researcher on college savings and debt, has other ideas. Instead, Professor Elliott believes exposing students to asset-building at an early age can alleviate the pressure on taking out student loans from the government.
How Much Is Student Debt in Canada?
As of 2022, the average student debt in Canada is $28,000 for bachelor’s degree holders. College grads have to repay around $16,000.
Over 1.7 million Canadians have opted for student loans. Out of these, 74% of citizens went for government loans while 30% go for private institutions. The total student loan in the country is approximately $22 billion.
When you combine these statistics with the rising cost of living, unemployment rate, and other responsibilities as a child, the loan becomes a shackle instead of propelling them into a better future. The government-sponsored loan system, while meant to offer aid to low-income families, seemed to have created the opposite effect of pushing them further into poverty and debt.
While loan forgiveness, postponement, and reduction programs exist, Professor Elliott considers them reductive. The real solution lies in Children’s Savings Accounts and preventing your child from going further into debt.
Is Drive All a Student Needs to Repay Their Debt?
We all get encouraged by extraordinary stories of people who rose from poverty and became prominent members of society. You often hear they had the drive to succeed. People would even claim rich or poor does not matter, as long as you are motivated.
Dr. Elliott would agree, to some extent. He calls it a delusional dream we sell to the poor which people like Professor Elliott ended up subscribing to.
But everyone is not so lucky to have their grandeurs become reality. When you are poor, you face immeasurable systematic hurdles you can not solve with talent and drive. A rich person with the same stimulation can easily achieve the connections and degree a poor kid has to get through debt.
Instead, what Professor Elliott wants is for low-income students to get the same opportunities. He uses the chair-floor analogy: someone jumping off the floor won’t hit the ceiling at the same speed someone from a chair.
The broken system presents student loans as a way to get on the same level as middle and upper class children. In practice, students end up thinking of a post-secondary degree as something which requires massive energy and is not worth the return. They look for alternate ways to earn without a fail-safe or give up on the future altogether.
While Professor Eliott is working to solve institutional issues, he has great faith in savings accounts to help the youth.
How Can Students Build Assets Early?
Building assets earlier in life can be a good way to help pay for the cost of college and avoid taking out student loans. There are several ways that students can build assets to help pay for college, including:
- Saving for college: Students can start saving for college as early as possible, either through a savings account or a college savings plan like a 529 plan. By saving early, students can take advantage of compound interest and potentially have more money to pay for college.
- Working part-time: Students who work part-time while in school can earn money to help pay for college expenses. This can reduce the need to take out student loans.
- Applying for scholarships and grants: Scholarships and grants are forms of financial aid that do not need to be repaid. Students can search for these opportunities and apply for them to help pay for college.
- Attending a cheaper school: Attending a cheaper school, either a community college or a public university, can also help reduce the need to take out student loans.
When we talk about asset building, the counterargument is exclusively about increasing the income level.
How can you save when all your income is spent on getting through the day? Again, this is something Dr. Elliott does acknowledge. However, when we only focus on the now, with subsidies and income which help low-income families temporarily, we make them think they only are allowed to live day to day.
What is an Income-First Approach to Student Debt?
An income-first approach to student debt refers to a repayment plan that bases loan payments on a borrower’s income. Under an income-first repayment plan, a borrower’s monthly loan payments are calculated as a percentage of their income, rather than a fixed amount.
Income-first repayment plans are designed to make student loan payments more affordable for borrowers by aligning the payments with their ability to pay. This can be especially helpful for borrowers with low or variable incomes, who may have difficulty making fixed monthly payments.
There are several income-first repayment plans available for student loans in the United States, including:
- Income-Based Repayment (IBR): Under IBR, a borrower’s monthly loan payments are capped at a percentage of their income. The percentage is determined by the borrower’s income and family size.
- Pay As You Earn (PAYE): PAYE is similar to IBR, but the monthly payment cap is set at a lower percentage of income.
- Revised Pay As You Earn (REPAYE): REPAYE is available to all borrowers with federal student loans, regardless of their income or family size. Under REPAYE, monthly loan payments are capped at 10% of a borrower’s income.
An income-first approach to student debt can be a helpful way to make loan payments more affordable for borrowers, particularly those with low or variable incomes. However, it is important to note that income-first repayment plans may result in borrowers paying more in interest over the long-term compared to other repayment plans.
Is It Better to Start Students with Assets, or undertake an Income-First Approach?
The smartest thing to do, over the asset or income first approach, is to combine both. Make long-term changes at systematic and institutional levels so poor people have more income to fall back on. And get them started on Children’s Savings Accounts as soon as they can. By the time their kids reach 18, they will have money to pay for their education, housing, and the time and desire to build connections to level up.
There are arguments both for and against the United States government pursuing an income-first approach to student loans.
One argument in favor of an income-first approach is that it can make student loan payments more affordable for borrowers, particularly those with low or variable incomes. By basing loan payments on a borrower’s income, an income-first approach can align payments with a borrower’s ability to pay, which can help prevent default and ensure that borrowers are able to repay their loans.
Another argument in favor of an income-first approach is that it can incentivize borrowers to pursue higher paying jobs. Under an income-first repayment plan, a borrower’s monthly loan payments will increase as their income increases, which can provide a financial incentive for borrowers to pursue higher paying jobs.
However, there are also arguments against an income-first approach to student loans. One argument is that it may result in borrowers paying more in interest over the long-term compared to other repayment plans. Under an income-first approach, a borrower’s monthly payments may be lower, but they may take longer to pay off their loans, resulting in more interest paid over time.
Another argument against an income-first approach is that it may not be fair to all borrowers. Some borrowers, such as those with high incomes or those who are able to pay off their loans quickly, may end up paying more in total under an income-first repayment plan compared to other repayment plans.
Some might argue not every child would want to get a degree post-secondary. They might start a business or offer their skill for hire.
My conversation with Professor William Elliott was one of the most powerful and productive times we had on the podcast. So much so, this episode is a little longer than you would expect.
You can hear the experiences which influenced the professor’s research and mandating financial education in high school.